Unexpected Windfall: The Upside of Flexible Spending Accounts

If you have read my past articles, you will notice that there are some clear advantages that I can see with using Flexible Spending Accounts for your expenses. They provide a means to escape the expenses of the taxes that would otherwise be imposed on the income used to spend the money. The cashflow of normal expenses is as follows:

$$ –> Taxes
$$ –> Income –> Your Bank Account –> Copay/Dr. Bill

The Flexible Spending Account (FSA) allows you to circumvent these taxes and cut them right out of the process entirely. As a result, the cash flow looks like this:

$$ –> Flexible Spending Account –> Income –> Your Bank Account –> Copay/Dr. Bill
Flexible Spending Account –> Income

This secondary step in the second series of diagrams is the unexpected windfall. Personally, I will have close to 120$ this year of money that will be returned to me via Flexible Spending Accounts for my health care expenses. These expenses are costs that I would normally have to pay anyway. They include over-the-counter medications that I use and keep in my medicine chest. They also include special medications that I had to buy recently when I was sick with the flu for a week or so. (It is hard to believe how expensive a few bottles of nyquil can be, even though I bought the generic kind.) Since this money is already spent, when I get it, it is like found money. I then can use this money to either pay additional principal on debt or invest or save. It really doesn’t matter because it doesn’t affect the monthly budget.

The key to using “found money” like this is discipline. I know that it is very easy and fun to treat yourself to something like a nice dinner or a new pair of shoes or a dvd when the check comes in, but, in reality, this money is spent already. In fact, it was spent on something very valuable, keeping you healthy. Now, you get that money back to use again! Not many times in life do you get to spend the same money twice.

By taking this money that you never really had or needed anyway and putting it into something for the future, the returns can be quite nice. Even a simple 120 dollars yearly, if invested in the stock market at a 10% return, would provide a total of close to 36000 dollars after 35 years. Not bad for money that you didn’t even need in the first place.

If you are somewhat like me, you might have a hard time getting yourself into the mode to invest the money. One option is to setup a separate account for all of your reimbursements if there are many of them. For example, with my Flexible Spending Account, I can have the money directly deposited into a bank account. There is likely no reason that this money could not be directly deposited into an investment or brokerage account to make sure that you don’t end up wasting it.

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